The authors examined the effects of ex post revelation of information about the risk type or the risk-reducing behaviour of insured in automobile insurance markets both for perfect competition and for monopoly. Specifically, they assumed that insurers can offer a contract with information revelation ex post, i.e., after an accident has occurred, in addition to the usual second-best contracts. Under moral hazard this always leads to a Pareto-improvement of social welfare. For adverse selection we find that this is also true except when bad risks under self-selecting contracts received an information rent, i.e., under monopoly or under competition with cross-subsidization from low to high risks. Regulation can be used to establish Pareto-improvement also in these cases. Privacy concerns do not alter our positive welfare results. (Author/publisher)
Abstract